RESEARCH & FORECAST REPORTPUGET SOUND REGION

Q2 2011 | OFFICE

www.colliers.com

With the second quarter of 2011 (Q2 2011) at a close, Colliers International Puget Sound is optimistic that the commercial real estate market is steadily moving away from 2009’s levels of high vacancy and negative absorption. In retrospect, 2009 proved to be one of the most difficult years for commercial real estate in recent history, while 2010 marked the beginning of market stabilization that is continuing into 2011. The projection for 2011 is that the Puget Sound commercial real estate market will continue to recover slowly, but at a faster pace than the rest of the nation. Washington State was fortunate to outperform the rest of the nation during most of the recession with lower unemployment and vacancy rates. However, the Puget Sound region’s unemployment rate is now currently 9.1% and the national average is 9.2%. According to Property and Portfolio Research (PPR), who analyze and forecast commercial real estate markets, a full job recovery in the Puget Sound’s is approximately three years away.

Puget Sound: A Stabilizing Market

The Puget Sound office market posted 1,357,567 SF of positive net absorption during Q2 2011. The Close-In Seattle office market experienced the most significant growth out of any other submarket with 742,792 SF of net positive absorption. The Pierce County office market was the only office market to post net negative absorption during Q2 2011 with a combined 87,275 SF vacant.

Much of this quarter’s absorption can be attributed to Amazon.com moving into 560,000 SF at Phase IV building in the South Lake Union submarket which was constructed during Q1 2011. The Bill & Melinda Gates Foundation also accounted for roughly 590,000 SF of newly occupied space during Q2 2011 when they moved into their newly constructed Fifth Ave North Campus buildings. On the Eastside, T-mobile moved into 165,000 SF in the newly renovated Two Newport in the Newport Corporate Center. Prior to this move, they occupied 33,000 SF in Sunset North Corporate Center, which they vacated Q2 2011. As businesses in the Puget Sound region continue to post quarterly profits and as the region outperforms other markets nationally, businesses are making stronger economic forecasts and planning to lease more space in the coming months. Expect vacancy to decrease through 2011, as financially stable companies take advantage of this true “tenants” market.

Construction companies who perform tenant improvements (TI’s) saw increased activity during 2010, providing an early indication that leasing activity was rising. As leasing activity continues to rise in the Puget Sound region, landlords are now starting to push back on concessions such as free rent, free parking and TI allowances. Although these concessions offered by landlords are still available for well credited, long term tenants the trend of decreasing vacancies and increasing tenant activity will impact the amount of TI’s and free rent offered by landlords. As landlords see increased occupancy, tenants can expect fewer concessions and gradually rising lease rates.

The Seattle office investment market continues to strengthen. Despite the economic challenges, Seattle still ranks 6th nationally for commercial real estate investment among the nation’s top 50 markets, according to Price Waterhouse Coopers. The arrival of increased sales volume and compressed cap rates suggests that the market is strengthening.

With the first half of 2011 behind us, investors and landlords are optimistic that the market is stabilizing. The Dow Jones Industrial Average closed June 30th 2011 at 12,414 points, as the market continues to show strong growth trends. Mortgage interest rates continue to remain low, while the residential housing front continues to send mixed signals. In the coming quarter, look for leasing activity to continue picking up and for tenants and investors to act on favorable conditions.

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Puget Sound Office MarketNew Supply, Absorption & Vacancy

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6%

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Q2

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New Supply Absorption Vacancy Rate

PUGET SOUND NEW SUPPLY, ABSORPTION & VACANCY

P. 2 | COLLIERS INTERNATIONAL

RESEARCH & FORECAST REPORT | Q2 2011 | OFFICE | PUGET SOUND

SEATTLEQ2 2011 Q3 2011

VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE

Q2 2011 Q3 2011 Q2 2011 Q3 2011 Q2 2011 Q3 2011

EASTSIDEQ2 2011 Q3 2011

VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE

Q2 2011 Q3 2011 Q2 2011 Q3 2011 Q2 2011 Q3 2011

The Seattle office market continues to show stabilization during the second quarter of 2011, as this marked the seventh consecutive quarter of positive absorption and declining vacancy. Vacancy decreased 128 basis points from 16.29% in Q1 2011 to 15.01% in Q2 2011. The Seattle office market also posted net positive absorption of 743,000 SF. Much of the positive absorption during Q1 2011 was due to Amazon.com moving into their 540,000 SF Phase IV project. However, this was offset in part by Amazon vacating roughly 250,000 SF at the Columbia Center in June. The Bill & Melinda Gates Foundation finished construction and began occupancy of their owned, 590,000 SF headquarter campus. In effect, the Gates Foundation will be vacating over 300,000 SF in the Lake Union submarket come third and fourth quarters of 2011. Other notable moves include:

ANNUAL DELIVERED VS. UNDER CONSTRUCTION

The Eastside office market saw a decrease in vacancy of 107 basis points from 12.26% in Q1 2011, to 11.19% in Q2 2011. The Eastside office year-over-year vacancy rate also decreased 71 basis points from 11.90% Q2 2010. The quarter-over-quarter and year-over-year vacancy decreases indicate that Eastside market is remaining stable. Absorption in the Eastside office market accounted for 299,329 SF of positive growth, including the opening of

VACANCY SHARE BY CLASS

> Amazon began occupancy of 538,984 SF Phase IV project (345 Boren Ave N).

> Blue Nile, Inc took 28,000 SF at Merrill Place (411 1st Ave S).

> Wilson Smith Cochran Dickerson took 17,000 SF (901 5th Ave.)

> Salesforce.com moved into 12,000 SF at West 8th (2001 8th Ave).

1 000 000

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Annual Delivered vs. Under Construction DeliveredUnd. Con

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2004 2005 2006 2007 2008 2009 2010 2011 YTD

Leasing activity in the Seattle office market has been on the rise for the past two years. There are currently 15 contiguous office spaces over the size of 100,000 SF still available on the market in Seattle. Tenants looking for 100,000 SF or more are finding fewer options as time goes by.

newly renovated Two Newport Tower, bringing 165,000 SF onto the market, which T-mobile has fully leased. The majority of positive absorption during Q2 2011 was shared by Class A and Class B office space where 244,000 SF and 157,000 SF were filled by new and expanding tenants respectively.

At end Q2 2011, there are 20 properties with contiguous vacant spaces above 50,000 SF available, accounting for 42.31% of all available vacant space in the Eastside office market. Of these 20 properties, 16 reside in Class A buildings, with 7 of them presiding in the Bellevue CBD submarket. Notable transactions that occurred during Q2 2011 include:

> AT&T Wireless renewed 287,000 SF at Redmond Town Center

> T-Mobile moved into 165,000 SF at Two Newport Tower

> ArenaNet leased 65,000 SF at Sunset North Corporate Center

> Expedia expanded into 60,000 SF in the Skyline Tower

46.2% 46.9%

3.1%

16.5%

7.8%

16.1%

2.0%6.9%

1.4%

7.1% 7.6%11.0%

17.0%

24.3%28.3%

3.3% 1.3%

16.3%

1.5%

9.6%

23.5%

46.2% 46.9%

3.1%

16.5%

7.8%

16.1%

2.0%6.9%

1.4%

7.1% 7.6%11.0%

17.0%

24.3%28.3%

3.3% 1.3%

16.3%

1.5%

9.6%

23.5%

P. 3 | COLLIERS INTERNATIONAL

RESEARCH & FORECAST REPORT | Q2 2011 | OFFICE | PUGET SOUND

NORTHENDQ2 2011 Q3 2011

VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE

Q2 2011 Q3 2011 Q2 2011 Q3 2011 Q2 2011 Q3 2011

SOUTH KING COUNTYQ2 2011 Q3 2011

VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE

Q2 2011 Q3 2011 Q2 2011 Q3 2011 Q2 2011 Q3 2011

The vacancy rate in the Northend office market decreased 80 basis points from 14.21% Q1 2011 to 13.41% Q2 2011. The vacancy rate in the Northend office market has dropped 1.17% since Q2 2010 when the vacancy rate was 14.58%. Absorption in the Northend office market saw a net gain of 90,000 SF bring the year-to-date total to 187,000 SF of positive net absorption. This is significant considering the total absorption for 2010 was a net loss of 123,000 SF. Though the Northend office market is far from a full recovery, the activity seen during Q1 2011 and Q2 2011 is a positive indication that the office market is stabilizing.

End Q2 2011, there is one Class A and four Class B properties with available contiguous vacant space above 50,000 SF, all residing in either the Bothell/Kenmore or the Everett/Lynwood submarkets. These properties account for 27.43% of all vacant space in the Northend office markets. Notable transactions within the Northend office market during Q2 2011 include:

> AT&T moved into 44,000 SF at Canyon Park Commons

> ADP moved out of 27,000 SF at Highlands Campus Tech Center and moved into 45,000 SF at Northview Corporate Center

> MetLife took 17,000 SF at Northview Corporate Center

> RH2 Engineering moved into 18,000 SF at Canyon Park 228 East

The South King County office market showed little change from Q1 2011 to Q2 2011. The vacancy rate decreased slightly, from 16.94% to 16.85% quarter over quarter. There was an increase in leasing activity during Q2 2011, but this was offset by Amazon vacating roughly 202,000 SF at the Amazon.com Building (1143 14th Ave S) as they moved to their newly constructed Phase IV project in Seattle. If it were not for Amazon moving locations, the South King County office market would have seen a significant uptick in positive absorption during Q2 2011 when compared to the -252,000 SF of negative absorption seen for the year of 2011. There were some notable tenant movements that occurred during Q2 2011 which include:

> Continental Mills moved into 58,000 SF at their newly constructed Corporate HQ building (18100 Andover Park W).

> Morpho Trak leased 47,000 SF at Evergreen Corporate Plaza (33405 8th Ave S).

> Rockwell Collins began their occupancy of 19,000 SF at East Campus Corporate Park II (32125 32nd Ave S).

> Emerald Commercial moved into 15,000 SF at Southcenter Corporate Square, Building 11 (375 Corporate Dr S).

NEW SUPPLY, VACANCY & ABSORPTION

ANNUAL ABSORPTION

-15%

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2003 2004 2005 2006 2007 2008 2009 2010 YTD

New Supply Absorption Vacancy Rate

P. 4 | COLLIERS INTERNATIONAL

RESEARCH & FORECAST REPORT | Q2 2011 | OFFICE | PUGET SOUND

512 offices in 61 countries

$1.5 billion in annual revenue

12,509 professionals

$59.6 billion in transaction value 979 million square feet under management

Bill Condon | Managing Director – Seattle601 Union St., Ste. 5300 | Seattle, WA 98101

Bret Jordan | Managing Director – Bellevue11225 SE 6th St., Ste. 240 | Bellevue, WA 98004

Chris Fox | Seattle Research Analyst206 654 0528 | chris.fox@colliers.com

Daniel Harden | Bellevue Research Analyst425 453 4544 | daniel.harden@colliers.com

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Colliers International

PIERCE COUNTYQ2 2011 Q3 2011

VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE

Q2 2011 Q3 2011 Q2 2011 Q3 2011 Q2 2011 Q3 2011

Q1 2011 proved slow for the South King County office market, but Q2 2011 made steps in the right direction posting positive absorption of 106,000 SF. Vacancy lowered 148 basis points, as it decreased from 17.33% in Q1 2011 to 16.12% in Q2 2011. Within the South King County office market, Class B buildings in the Puyallup submarket fared the best as 64,000 SF was leased. East Pierce County was the only submarket to post negative total

absorption with 1,000 SF. The overwhelming majority of direct vacant space exists in the Class B market place with 851,000 SF or 73.15% of all direct vacant space. Class A office space was the only class to post negative absorption with 22,000 SF.

The office investment market in South King County continues to see slow growth as only $3,997,487 in transaction sales took place last quarter, bringing the last four quarter total to just below $30 million in office sales. This is compared to the first two quarters of 2010 where there were over $66 million in office trades. Noteable transactions within the South King County office market during Q2 2011 include:

> Geneva Foundation leased 10,000 SF in the Provident Building (913-921 Pacific Ave)

VACANCY BY BUILDING CLASS AND SIZE